• The Placebo Effect (or The Power of Expectations)

Imagine you are suffering from a bad headache. You want to be tough and pull through it without any external help but the pain is overwhelming so you cave and go to the pharmacy. You have a decision to make. You can either buy the prominent, nationally renowned brand-name medication, or the generic, no-name painkiller that is cheaper.

Despite a lingering doubt about how effective the no-name medication will be, you go ahead and purchase it, as you don’t feel like spending the extra money for a simple painkiller. You come home, take a pill with a glass of water and wait for it to kick in. An hour goes by and you are still feeling the pain. Annoyed by this, you take another pill and cross your fingers. Another hour goes by and the headache is still there. Tired by this ordeal, you give up and just lie down and close your eyes for a nap.

Now think about this scenario

You go to the pharmacy and purchase the most expensive painkiller you can find. You come home; pop one of those pills and boom! In less than an hour your headache is gone.

This is a simple yet powerful example of how expectations shape our perceptions and the way we experience things in life. We expect the expensive medication to be more effective even though the active ingredient in these two hypothetical bottles is exactly the same.

“Marketing is all about providing information that will heighten someone’s anticipated and real pleasure.”

-Dan Ariely

So how does this apply to business?

Marketers are always looking for ways to build up hype for new products, raise expectations so that they can create anticipation and enhance the experience when customers actually interact with their products. Moreover, shaping expectations is not limited to pricing strategy. When you think about Volvo, you think about safety; when you think about Chevrolet, perhaps not. However, according to safercar.gov, Chevy Impala is just as safe as a Volvo S60, receiving a 5-star rating on overall safety tests. The examples can go on but the point is that businesses work relentlessly to influence our experiences by shaping our perceptions.

Let’s revisit the medication example and take a look at a research study that was conducted to observe the effect of price on customer experience. To test the placebo effect, Baba Shiv, Ziv Carmon and Dan Ariely gave two groups of students a certain brand of energy drink that claims to enhance mental functions, prior to solving a puzzle. The first group paid a premium price for the beverage while the price was marked down significantly for the second group. To set a point of reference, they also gave the puzzle to a control group that was not given the energy drink in question.

According to the results, the control group and the students who bought the beverage at full price solved an average of 9 out of 15 puzzles. What is interesting is that the group that bought the drink on discount was only able to solve an average of 6.5 questions, which translates into a 28% difference in performance between the two groups that were being tested.

As irrational as this seems, we instinctively assume that a product is better than its counterparts if it is priced at a premium level. When AMD started competing against tech giant Intel, it adopted a market penetration strategy by pricing its microprocessors lower than the competition in order to steal market share. This created a perception among shoppers that AMD products are worse than Intel, even though they performed equally (or in some cases even better) in most tests.

In short, expectations are powerful influencers of perception and in turn, experiences. As difficult as it is to set aside preconceptions when looking at a brand, it might serve us better to compare products based on the features and benefits they offer rather than how they are positioned to be perceived.